Continuously improving customer experience. HANNOVER, GERMANY

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1 HANNOVER, GERMANY Continuously improving customer experience. To ensure excellent service, we gather constant customer feedback and carry out end-user research. This insight helps us to continuously improve our customer service. KONE Q3 INTERIM REPORT FOR JANUARY SEPTEMBER 2014

2 KONE s Q3: Strong orders received and positive development overall Q3 2 July September 2014 In July September 2014, orders received totaled EUR 1,577 (7 9/2013: 1,327) million. Orders received grew by 18.8% at historical exchange rates and by 17.4% at comparable exchange rates. Net sales grew by 8.0% to EUR 1,878 (1,739) million. At comparable exchange rates the growth was 7.9%. Operating income was EUR (257.5) million or 14.8% (14.8%) of net sales. Cash flow from operations (before financing items and taxes) was EUR (349.0) million. KONE specifies its outlook for KONE s net sales is estimated to grow by 6 8% at comparable exchange rates as compared to The operating income (EBIT) is expected to be in the range of EUR 1,015 1,045 million. KONE previously estimated its net sales to grow by 6 9% at comparable exchange rates as compared to The previous operating income (EBIT) outlook was EUR 1,000 1,050 million assuming that translation exchange rates would not materially deviate from the situation of the beginning of January September 2014 In January September 2014, orders received totaled EUR 5,109 (1 9/2013: 4,678) million. Orders received grew by 9.2% at historical exchange rates and by 12.3% at comparable exchange rates. The order book stood at EUR 6,996 (Sep 30, 2013: 5,642) million at the end of September Net sales grew by 5.5% to EUR 5,169 (4,900) million. At comparable exchange rates the growth was 7.9%. Operating income was EUR (660.7) million or 13.9% (13.5%) of net sales. Cash flow from operations (before financing items and taxes) was EUR (972.2) million. KEY FIGURES 7 9/ / / / /2013 Orders received MEUR 1, , , , ,151.0 Order book MEUR 6, , , , ,587.5 Sales MEUR 1, , , , ,932.6 Operating income (EBIT) MEUR Operating income (EBIT) % Cash flow from operations (before financing items and taxes) MEUR ,213.1 Net income MEUR Basic earnings per share EUR Interest-bearing net debt MEUR Total equity/total assets % Gearing %

3 3 KONE s January September 2014 review Henrik Ehrnrooth, President and CEO, in conjunction with the review: We continued our solid performance in the third quarter. I am particularly pleased with our strong order intake of EUR 1,577 million, which represented a growth of 18.8%, as well as our very strong cash flow of EUR million. Our orders received grew in all regions. New equipment orders developed very positively with good development in the volume business and an exceptionally strong development in major projects. Our sales developed also well, totaling EUR 1,878 million, with a growth of 8.0%. Sales grew in all businesses. On a regional basis, growth was the strongest in Asia-Pacific. Also the EMEA region saw some growth. In North America, our sales was stable. Operating income grew and was EUR million. Our growth continued to be profitable and the operating margin was at last year s level at 14.8%. We saw no major changes in the market environment during the third quarter. The Chinese new equipment market continued to grow well, although the development varied clearly between regions within the country. The rest of Asia-Pacific saw a mixed development. In North America, good development continued with the United States developing particularly well. In Europe, uncertainty in the market increased again somewhat. Pricing competition remained intense in many markets both in new equipment and in services. I want to thank our employees for continuously delivering good results in these varying market situations. To sustain our good development in the current environment, we continue to work on further improving our understanding of the markets at a granular level as well as on driving our sales activities. We also have strong focus on developing the cost competitiveness of our products and on managing fixed costs. Our development programs are progressing well. As a good example, the focus on customer experience has resulted in improving customer loyalty, as we could see in the results of our most recent customer loyalty survey, which was finalized during the quarter. What is important for us going forward is to further improve our interaction with our customers both in terms of customer communication and in receiving feedback from them. This helps us in serving our customers better and strengthening our differentiation.

4 4 Key Figures Orders received (MEUR) 6,151 5,496 5,109 1, % 1,327 1, Q3/2014 In July September 2014, orders received grew by 18.8% % at historical exchange rates (at comparable exchange rates by 17.4%). New equipment orders received grew strongly and modernization orders received grew somewhat. Major projects orders saw particularly high growth, and also in the volume business, orders received grew significantly. Maintenance contracts are not included in orders received. Orders received grew strongly in Asia-Pacific at comparable exchange rates, grew clearly in the EMEA region and very strongly in North America. In January September 2014, new equipment orders grew significantly, while modernization orders declined clearly from the exceptionally high comparison level. In the EMEA region orders received grew somewhat at comparable exchange rates. In the Americas region orders received grew slightly as compared to the exceptionally high comparison level, and grew strongly in the Asia-Pacific region. Order book (MEUR) 6, % 5,587 5,642 The order book grew by 24.0% at historical rates compared to the end of September 2013 (at comparable exchange rates by 18.6%). In July September 2014, the margins of orders received were rather stable at a good level. In January September 2014, the margin of the order book remained at a healthy level. Q4/2013 Q3/2013 Q3/2014 Sales (MEUR) During July September 2014, net sales grew by 8.0% at historical exchange rates (at comparable exchange rates 7.9%). 1,634 6,277 1,739 6,933 1,878 5,169 +8% New equipment sales grew by 10.0% (at comparable rates by 10.1%). Service (maintenance and modernization) sales grew by 5.5% (5.3%), with maintenance sales growing by 6.7% (6.3%) and modernization sales by 2.6% (2.9%). Net sales grew at comparable exchange rates in the EMEA region and Asia- Pacific. The development was rather stable in the Americas region. During January September 2014, sales in the EMEA region grew somewhat at comparable exchange rates. Sales in the Americas region was stable. In the Asia-Pacific region, sales grew significantly Q3/2014

5 5 Key Figures EBIT 1 (MEUR) In July September 2014, operating income was 14.8% of net sales (7 9/2013: 14.8%). The growth in operating income was a result of continued positive development across businesses in Asia-Pacific and North America, as well as a good development in the maintenance business in Europe Additionally, the pricing actions taken during the past two years had a positive impact on the growth in operating income by offsetting some of the pressure from the intense price competition seen in many markets % In January September 2014, operating income was 13.9% of net sales (1 9/2013: 13.5%) Q3/2014 1) Operating income excluding one-time items Working capital 2 (MEUR) In January September 2014, the improvement in net working capital was largely due to a good level of advance payments received relative to inventories, especially in Asia-Pacific, as well as an increase in accounts payable and other non-interest-bearing liabilities Q3/2013 Q4/2013 Q3/2014 2) Including financing and tax items Cash flow 3 (MEUR) 1,213 In January September 2014, cash flow remained strong. The strong cash flow was achieved through growth in operating income and an improvement in net working capital before financing items and taxes. 1, Q3/2014 3) Cash flow from operations before financing items and taxes

6 6 KONE s January September 2014 review Accounting Principles KONE Corporation s Interim Report for January September 2014 has been prepared in line with IAS 34, `Interim Financial Reporting and should be read in conjunction with KONE s financial statements for 2013, published on January 28, KONE has applied the same accounting principles in the preparation of this Interim Report as in its Financial Statements for 2013, except for the adoption of new standards and interpretations effective during 2014 that are relevant to its operations. The changes did not have material impact on the Interim Report. The information presented in this Interim Report has not been audited. July September 2014 review Operating environment in July September In the third quarter of 2014, good growth in the global new equipment market continued. Markets in Asia-Pacific and North America continued to grow, while the development in the Europe, Middle East and Africa (EMEA) region was mixed. The major projects segment was rather stable compared to the previous year, with good activity in North America, China and the Middle East but a weaker development in Europe. The modernization market was rather weak overall in Europe, developed positively in North America and saw some growth also in Asia-Pacific. Maintenance markets grew globally, although at low rates in such countries, where new equipment activity has been weak for the past years. In the EMEA region, the new equipment market in Central and North Europe was rather stable compared to the previous year excluding the infrastructure segment, which declined. The residential segment was the most significant driver of market volumes. At the country level, new equipment demand continued to grow in Germany and remained at a good level in Great Britain. In most other parts of Central and North Europe, market development was rather stable. However, overall economic uncertainty again slightly increased in the area. In Russia, the market declined strongly. In South Europe, new equipment demand remained weak across segments. The new equipment market further declined in France and Italy, but in Spain the slight improvement from a very low level continued. In Turkey and the Middle East, new equipment demand grew. The modernization market declined slightly in Central and North Europe, and remained depressed in South Europe. The maintenance market grew, although with significant variation between countries. In North America, new equipment demand grew with the market in the United States seeing continued solid growth. This was driven by positive development across segments, with residential and commercial development continuing as the major drivers of growth. In Canada, new equipment demand was rather stable. In modernization, activity in North America remained on a growth path. Also the maintenance market continued to grow, albeit slowly as a result of low volumes in new equipment in prior years. In the Asia-Pacific region, the new equipment market continued to grow. The Chinese new equipment demand continued to grow clearly compared to the previous year. As in the first half of the year, the major driver of market growth in China was the residential segment, excluding affordable housing. While demand in affordable housing was rather stable, the segment remained important in volume terms. Other residential segments grew in both larger and smaller cities, but with a clearly diversified development between locations. The first-tier cities continued to show the strongest development overall, while development in lower-tier cities varied significantly. Also non-residential segments grew, with continued positive development in commercial segments. The infrastructure segment was rather stable, but with continued good activity in metro and airport projects. In India, new equipment demand declined compared to the previous year, with slowness still visible in customers decision-making despite improving economic fundamentals. In Australia, new equipment demand remained on a solid trend, and some growth was seen also in modernization. The Southeast Asian new equipment markets saw some growth, but local uncertainty continued to burden development in Thailand and Indonesia. Maintenance markets in Asia-Pacific saw good growth, following the positive development of new equipment demand in the region. In the third quarter, price competition remained intense in many markets. In Asia-Pacific, intense price competition continued in the Chinese new equipment market, but the rest of Asia-Pacific saw a rather stable development. In the EMEA region, the pricing environment in new equipment was the most challenging in South European markets with persisting low volumes. The pricing of new equipment in North America continued to improve slightly, particularly in the volume business. In maintenance and modernization, the pricing environment was characterized by intense competition in the EMEA region, particularly in South Europe and also in some of the Central and North European markets. Also in North America, price competition remained intense in maintenance, but continued to slightly ease in modernization. Financial performance in July September Orders received grew by 18.8% as compared to July September 2013, and totaled EUR 1,577 (7 9/2013: 1,327) million. At comparable exchange rates, KONE s orders received increased by 17.4%. New equipment orders received grew strongly and modernization orders received grew somewhat. Major projects orders saw particularly high growth, and also in the volume business, orders received grew significantly. The margins of orders received were rather stable at a good level. KONE does not include maintenance contracts in orders received. Orders received grew in all geographic regions. At comparable exchange rates, they grew strongly in Asia-Pacific, with China in particular contributing to the growth along with Malaysia and Australia. In the EMEA region, orders received grew clearly. They declined slightly in Central and North Europe, but grew somewhat in South Europe and very strongly in the Middle East. Of the larger European markets, orders received grew clearly in France and were rather stable

7 7 KONE s January September 2014 review SALES BY GEOGRAPHICAL REGIONS, MEUR 7 9/2014 % 7 9/2013 % 1 9/2014 % 1 9/2013 % 1 12/2013 % EMEA 1) , , , Americas , Asia-Pacific , , , Total 1, , , , , ) EMEA = Europe, Middle East, Africa Sales by business Sales by area Personnel by area 12% (13%) (53%) 54% 42% (39%) (45%) 44% 43% (40%) (47%) 45% 34% (34%) (16%) (13%) 14% 12% New equipment Maintenance Modernization 1 9/2014 (1 9/2013) EMEA Americas Asia-Pacific 1 9/2014 (1 9/2013) EMEA Americas Asia-Pacific Sep 30, 2014: 46,221 (December 31, 2013: 43,298) in Germany, but declined strongly in Great Britain. KONE s order intake grew very strongly in North America driven by growth in all countries. KONE s net sales grew by 8.0% as compared to July September 2013, and totaled EUR 1,878 (7 9/2013: 1,739) million. At comparable exchange rates KONE s net sales growth was 7.9%, with sales growth in the EMEA region and Asia- Pacific and a rather stable development in the Americas region. New equipment sales accounted for EUR 1,058 (962.0) million and represented an increase of 10.0% over the comparison period. At comparable exchange rates, new equipment sales grew by 10.1%. Service (maintenance and modernization) sales grew by 5.5% and totaled EUR (777.3) million. At comparable exchange rates, service sales grew by 5.3%. Maintenance sales was EUR (548.9) million and grew by 6.7% at historical and by 6.3% at comparable exchange rates. Maintenance sales include elevator and escalator maintenance as well as KONE s automatic doors business. Modernization sales increased by 2.6% and totaled EUR (228.3) million. At comparable exchange rates, modernization sales increased by 2.9%. KONE s operating income for the July September 2014 period totaled EUR (257.5) million or 14.8% (14.8%) of net sales. The growth in operating income was a result of continued positive development across businesses in Asia- Pacific and North America, as well as a good development in the maintenance business in Europe. Additionally, the pricing actions taken during the past two years had a positive impact on the growth in operating income by offsetting some of the pressure from the intense price competition seen in many markets. KONE continued to increase fixed costs in areas that support the growth of the business, in particular in Asia-Pacific, in the Middle East, as well as process development and IT. Cash flow from operations before financing items and taxes in July September 2014 was EUR (349.0) million. Growth in operating income and an improvement in net working capital before financing items and taxes were the main contributors for the strong cash flow. The improvement in net working capital was largely due to a good level of advance payments received relative to inventories, especially in Asia-Pacific, as well as an increase in accounts payable and other non-interest-bearing liabilities.

8 8 KONE s January September 2014 review January September 2014 review Orders received and Order book in January September During January September 2014, the new equipment market in Asia-Pacific continued to grow, driven by clear growth in China. In the EMEA region, the development of new equipment markets was varied. The market grew slightly in Central and North Europe and saw positive development in the Middle East, but remained on a declining trend in South Europe. In North America, strong development in new equipment demand continued. In modernization, the market in Central and North Europe saw some growth, but declined in South Europe. In North America the modernization market developed very positively, and growth was seen also in Asia-Pacific. The maintenance market continued to grow globally, driven by Asia-Pacific following the positive development of the new equipment market in the region. The pricing environment was challenging in all businesses, in particular in countries suffering from a prolonged weakness in the new equipment market. Orders received increased by 9.2% from January September 2013, and reached a level of EUR 5,109 (1 9/2013: 4,678) million. At comparable exchange rates, orders received increased by 12.3%. In new equipment, orders received grew significantly during January September KONE s orders received developed positively in both the volume and major projects businesses. In modernization, orders received declined clearly from the exceptionally high level of January September Maintenance contracts are not included in orders received. The order book grew by 24.0% compared to the end of September 2013, and stood at a record high level of EUR 6,996 (Sep 30, 2013: 5,642) million at the end of the reporting period. At comparable exchange rates, the increase was 18.6%. The margin of the order book remained at a healthy level. The margins of orders received were also stable at a good level, despite the intense price competition seen in many markets. Orders received in the EMEA region grew somewhat at comparable exchange rates as compared to January September New equipment orders received grew clearly in the EMEA region. In Central and North Europe, they declined somewhat, but grew in South Europe. In the Middle East, new equipment orders received grew very strongly. KONE s modernization order intake in the EMEA region was stable as compared to January September 2013, with slight growth in Central and North Europe, but a decline in South Europe. Orders received in the Americas region grew slightly as compared to the exceptionally high level of January September 2013, with a very large individual modernization order in the United States impacting the comparison period. Excluding this impact, orders received in North America grew strongly. New equipment orders received developed very positively, with very strong growth in the United States. In modernization, orders received declined strongly in North America due to the above-mentioned order in the comparison period. Excluding the impact of this order, they grew strongly. Orders received in the Asia-Pacific region grew strongly as compared to January September of New equipment orders received grew strongly, with significant growth in China and very strong growth in Australia as well as Southeast Asia. Modernization orders received grew somewhat, driven by growth in Australia and Southeast Asian markets. Net sales KONE s net sales increased by 5.5% as compared to January September 2013, and totaled EUR 5,169 (1 9/2013: 4,900) million. At comparable exchange rates the increase was 7.9%. New equipment sales accounted for EUR 2,815 (2,592) million of the total and represented an increase of 8.6% over the comparison period. At comparable exchange rates, new equipment sales grew by 11.5%. Service (maintenance and modernization) sales increased by 2.0%, and totaled EUR 2,354 (2,308) million. At comparable exchange rates, service sales grew by 3.9%. Maintenance sales grew by 4.1% at historical and by 6.0% at comparable exchange rates, and totaled for EUR 1,722 (1,654) million. Modernization sales declined by 3.4%, and totaled EUR (653.6) million. At comparable exchange rates the decline was 1.4%. The share of new equipment sales was 54% (53%) and the share of service sales 46% (47%) of total sales, with maintenance representing 34% (34%) and modernization 12% (13%) of total sales. Sales in the EMEA region grew somewhat at comparable exchange rates as compared to January September New equipment sales grew clearly and maintenance sales grew somewhat, while modernization sales declined. Sales in the Americas region was stable as compared to January September Maintenance sales grew somewhat, but new equipment and modernization sales declined. Sales in the Asia-Pacific region grew significantly as compared to January September 2013, with significant growth in new equipment, maintenance and modernization sales. The geographical distribution of net sales was 44% (45%) EMEA, 14% (16%) Americas and 42% (39%) Asia-Pacific. Financial result KONE s operating income (EBIT) grew and reached EUR (1 9/2013: 660.7) million or 13.9% (13.5%) of net sales. The growth in operating income was a result of continued positive development across the business in Asia-Pacific and North America, as well as a good development in the maintenance business in Europe. Additionally, the pricing actions taken during the past two years had a positive impact on the growth in operating income by offsetting some of the pressure from the intense price competition seen in many markets. KONE continued to increase fixed costs in areas that support the growth of the business, in particular in Asia-Pacific, in the Middle East, as well as R&D, process development and IT.

9 9 KONE s January September 2014 review Net financing items was EUR 13.5 (23.0) million. Net financing items was impacted by negative foreign exchange valuation of option liabilities related to acquisitions. KONE s income before taxes was EUR (685.1) million. Taxes totaled EUR (157.8) million, taking into account taxes proportionate to the amount estimated for the financial year. This represents an estimated effective tax rate of 23.3% for the full financial year. Net income for the period under review was EUR (527.3) million. Earnings per share was EUR 1.07 (1.01). Consolidated statement of financial position and Cash flow KONE s financial position was very strong at the end of September Cash flow generated from operations (before financing items and taxes) in January September 2014 was EUR (1 9/2013: 972.2) million. Cash flow remained strong. The strong cash flow was achieved through growth in operating income and an improvement in net working capital before financing items and taxes. Net working capital improved and was at the end of September 2014 EUR (December 31, 2013: ) million, including financing items and taxes. The improvement in net working capital was largely due to a good level of advance payments received relative to inventories, especially in Asia- Pacific, as well as an increase in accounts payable and other non-interest-bearing liabilities. Interest-bearing net debt at the end of September 2014 was EUR (December 31, 2013: ) million. KONE s cash and cash equivalents together with current deposits and loan receivables were EUR 1,091 (890.6) million at the end of the reporting period. Interest-bearing liabilities were EUR (273.8) million, including a net pension liability of EUR (134.7) million and short-term loans of EUR 11.8 (17.2) million. In addition, the interest-bearing net debt includes EUR (100.8) million of option liabilities from acquisitions. Gearing was -41.9%, compared with -36.1% at the end of KONE s total equity/total assets ratio was 41.5% at the end of September (December 31, 2013: 43.7%). Equity per share was EUR 3.49 (3.30). Capital expenditure and acquisitions KONE s capital expenditure, including acquisitions, totaled EUR 76.3 (1 9/2013: 101.0) million. Capital expenditure, excluding acquisitions, was mainly related to facilities and equipment in R&D, IT and production. Acquisitions accounted for EUR 21.2 (49.3) million of this figure. During January September 2014, KONE acquired the elevator and escalator businesses of its authorized distributors in East and Central Africa, Marryatt & Scott (Kenya) Ltd. and Marryats East Africa Limited. In addition, KONE completed a number of small acquisitions of maintenance companies in Europe and the United States during the reporting period. The acquisitions completed during the reporting period do not individually or as a whole have a material impact on the result or financial position of KONE. Research and development Research and development expenses totaled EUR 72.9 (1 9/2013: 68.7) million, representing 1.4% (1.4%) of net sales. R&D expenses include the development of new product and service concepts and the further development of existing solutions and services. KONE s elevators and escalators are based on industry-leading energy efficient technology. KONE s customers and end-users are at the center of its research and development efforts. In accordance with its vision of delivering the best People Flow experience, KONE focuses on understanding the needs of its customers and the users of its solutions in order to make people flow in buildings smoother and improve the user experience. The aim of one of KONE s five development programs, the Most Competitive People Flow Solutions, is to offer industry-leading elevators and escalators and further develop KONE s People Flow Intelligence solutions for smart buildings of the future. During January September 2014, KONE launched a number of new solutions. Among the major product introductions was that of the KONE NanoSpace, a revolutionary full replacement solution for elevators with the quickest replacement process on the market as well as excellent space efficiency, ride comfort and eco-efficiency. KONE also announced the launch of a new turnstile solution to complement its People Flow Intelligence offering. In addition, various extensions and new introductions to KONE s solutions in North America and Asia-Pacific were made during the reporting period. During the third quarter of the year, KONE continued to develop and extend its product offering. In India, enhancements to KONE s elevator offering for the mid- and high-rise residential, office and hotel segments were released. In August, KONE was ranked 42nd out of the 100 most innovative companies in the world by the business magazine Forbes (2013: 37). Out of all European companies listed in 2014, KONE was ranked sixth. KONE was listed by Forbes for the fourth consecutive year and is the only elevator and escalator company featured this year. Change of President and CEO KONE s Board of Directors appointed Henrik Ehrnrooth as President and Chief Executive Officer as of April 1, Previously, he had been Executive Vice President, Chief Financial Officer of KONE since May 1, As President and CEO he succeeded Matti Alahuhta, who led KONE from January 1, 2005 until March 31, Changes in the Executive Board Eriikka Söderström was appointed Executive Vice President, Chief Financial Officer and a member of the KONE s Executive Board as of April 1, Previously, she had been Senior Vice President, Corporate Controller of KONE since February 11, She reports to Henrik Ehrnrooth, President and CEO of KONE Corporation. Noud Veeger was appointed Executive Vice President responsible for Central and North Europe as of September 1, He succeeded Ari Lehtoranta, who left KONE as of September 1, Previously, Noud Veeger had been respon-

10 10 KONE s January September 2014 review sible for KONE s business in Asia-Pacific and the Middle East. He continues as a member of the Executive Board and reports to Henrik Ehrnrooth. Neeraj Sharma was appointed Executive Vice President, Asia-Pacific and the Middle East as of September 1, He had been Managing Director for KONE India since He became a member of the Executive Board and reports to Henrik Ehrnrooth. As of September 1, 2014, Tomio Pihkala assumed the responsibility for KONE s Global Development function in addition to his previous role as Executive Vice President responsible for Safety, Quality and Installation. With the combination of these functions into one global organization, Tomio Pihkala continues as a member of the Executive Board reporting to Henrik Ehrnrooth in the position of Executive Vice President, Operations Development. In addition, in August 2014 KONE announced that Max Alfthan has been appointed Executive Vice President responsible for Marketing and Communications as of November 17, He will become a Member of the Executive Board and report to Henrik Ehrnrooth, President and CEO of KONE Corporation. Max Alfthan succeeds Anne Korkiakoski, who left KONE as of August 1, Personnel The objective of KONE s personnel strategy is to help the company meet its business targets. The main goals of this strategy are to further secure the availability, engagement, motivation and continuous development of its personnel. All of KONE s activities are guided by ethical principles. The personnel s rights and responsibilities include the right to a safe and healthy working environment, personal well-being as well as the prohibition of any kind of discrimination. One of the five development programs launched at the beginning of 2014 was defined as A Winning Team of True Professionals. As part of this program, KONE launched several initiatives in January to help all employees perform at their best, to enhance the systematic development of field competences, and to ensure attracting the right talent to all positions. During the reporting period, the delivery of new management programs targeted to general managers and installation managers continued. In addition, competence development surveys for key field roles were piloted to support systematic competence evaluation and the planning of development actions. The global roll-out of KONE s learning management system continued with the system going live in Asia-Pacific as well as in the Middle East. Mid-year reviews were conducted with a strong focus on individual development planning. Additionally, in order to further deepen collaboration with schools and to attract new talent, KONE trained a group of approximately 90 employees from different countries to present the company in schools and recruitment events around the world. Support material for building local apprentice programs in growth markets was also launched in order to secure the availability of skilled personnel. KONE had 46,221 (December 31, 2013: 43,298) employees at the end of September The average number of employees was 44,655 (1 9/2013: 40,723). The geographical distribution of KONE employees was 45% (December 31, 2013: 47%) in EMEA 12% (13%) in the Americas and 43% (40%) in Asia-Pacific. Environment For KONE, environmental responsibility is a combination of offering its customers innovative solutions that are both energy- and cost-efficient, and reducing the adverse environmental impacts of its own operations. The focus in developing eco-efficient solutions is on further improving energy-saving stand-by and hoisting solutions for elevators as well as innovative energy-saving solutions for escalators. KONE aims to strengthen its position as a leader in sustainability in its industry, supporting governmental and other green building initiatives and the ongoing transformation of the built environment into smart eco-cities globally. KONE has set ambitious environmental targets for with the focus on reducing greenhouse gas emissions from KONE s own operations. The most significant impact on KONE s carbon footprint from its own operations relates to the company s vehicle fleet, electricity consumption, and logistics. KONE also continues to focus on the environmental aspects of its supply chain network. KONE published its Corporate Responsibility Report 2013 in June The report follows the application level B of the Global Reporting Initiative guidelines. Additionally, in June KONE was ranked the world s 12th greenest company by the American magazine Newsweek. During July September 2014, KONE received the Green Label certifications of the Singapore Green Building Council for KONE N MiniSpace and KONE N MonoSpace elevators. In addition, KONE s manufacturing facilities received recognition for their sustainability. KONE s largest manufacturing unit in Kunshan, China was granted a LEED Gold certification under the U.S. Green Building Council s rating system. KONE s manufacturing unit in Hyvinkää, Finland was awarded by the City of Hyvinkää for long-term efforts in improving its energy efficiency. This work has included the renovation of the existing manufacturing facilities and the construction of a new LEED Gold certified visitor center next to KONE s factory. Other events In 2007 a decision was issued by the European Commission concerning alleged local anticompetitive practices before early 2004 in Germany, Luxembourg, Belgium and the Netherlands by leading elevator and escalator companies, including KONE s local subsidiaries. Also, the Austrian Cartel Court issued in 2007 a decision concerning anticompetitive practices that had taken place before mid-2004 in local Austrian markets by leading elevator and escalator companies, including KONE s local subsidiary. As announced by KONE earlier, a number of civil damage claims by certain companies and public entities, relating to the two 2007 decisions, are pending in related countries. The claims have been made against

11 11 KONE s January September 2014 review various companies concerned by the decisions, including certain KONE companies. All claims are independent and are progressing procedurally at different stages, with some processes having ended favorably for KONE. The total capital amount claimed jointly and severally from all of the defendants together was EUR 283 million at the end of September (June 30, 2014: EUR 283 million). KONE s position is that the claims are without merit. No provision has been made. Risk management KONE is exposed to risks that may arise from its operations or changes in the business environment. The risk factors described below can potentially have an adverse effect on KONE s business operations and financial position, and as a result the value of the company. Other risks, which are currently either unknown or considered immaterial to KONE may, however, become material in the future. A weakening of the global economic environment could result in a deterioration of the global new equipment markets. A disruption in the growth of the construction market in Asia, in China in particular, could result in a decline of the elevator and escalator market. A further weakening of the new equipment market in Europe or a slower than expected growth of the new equipment market in North America could lead to increasingly intensified price competition in both the new equipment and service businesses. All of the abovementioned factors could lead to a decrease in orders received, cancellations of agreed deliveries, delays in the commencement of projects, further intensified price competition, and, as a result, have a negative effect on KONE s profitability. To counteract the pressures resulting from a possible deterioration of the overall economic environment and its impact on the elevator and escalator markets, KONE strives to continuously develop its overall competitiveness. KONE operates in an industry with various local regulatory requirements in both the new equipment and service businesses. Sudden or unanticipated changes in regulations, codes or standards may result in a need for process or technology adjustments, which could adversely affect KONE s profit development in affected countries. In order to mitigate the risk of unanticipated changes in the regulatory environment, KONE is actively involved in the development of regulations, codes and standards that aim to further improve the safety of elevators, escalators and automatic doors. KONE operates in certain markets with high growth rates, where focused management of rapid business growth is required. This applies in particular to the availability of skilled personnel as well as the adequate supply of components and materials, as well as ensuring the quality of delivered products and services. Failure to adequately manage resourcing and quality could result in delays in deliveries and increases in costs, which in turn could have an adverse impact on the profitability of the company. KONE manages these risks through proactive project and resource planning and strict quality control processes. KONE introduces new technology and continuously develops its existing products and its product competitiveness based on anticipated future developments in relevant technologies, customer needs and market requirements. The execution of new technology or product releases and the large supplier base involve risks related to the uninterrupted functioning of the delivery chain, product integrity and quality. To mitigate such risks, KONE follows defined design, supply, manufacturing and installation processes. Strict quality control processes are also in place in the product and solution development and delivery chain. KONE s business activities are dependent on the uninterrupted operation, quality and reliability of sourcing channels, production plants, and logistics processes. A significant part of KONE s component suppliers and supply capacity is located in China. The risks related to the supply chain are controlled by analyzing and improving the fault tolerance of processes, diligent forecasting, close cooperation with KONE s suppliers and by increasing the readiness for transferring the manufacturing of critical components from one production line or supplier to another. KONE actively monitors the operations and financial strength of its key suppliers. The aim is also to secure the availability of alternative sourcing channels for critical components and services. Additionally, KONE has a global property damage and business interruption insurance program in place. KONE s operations utilize information technology extensively. This may expose KONE to information security violations, misuse of systems and/or data, viruses, malwares and to such malfunctions, which can result in system failures or disruptions in processes and therefore impact KONE s business. Clear roles and responsibilities have been defined to manage IT security risks to ensure that adequate security is inbuilt within the IT management processes according to security policies, principles and guidelines. KONE s profit development could be adversely affected if its productivity improvement targets were not met. These risks are managed through proactive planning and forecasting processes and constant process development, through the introduction of new technologies, as well as through the outsourcing of certain activities. Changes in raw material and component prices are reflected directly in the production costs of elevators, escalators and automatic doors, and may therefore have an impact on KONE s profitability. In order to reduce the impact of material and sourcing price fluctuation KONE aims to enter into fixed-price contracts with its major suppliers for a significant part of its raw material and component purchases. Because the maintenance business deploys a significant fleet of service vehicles, fuel price fluctuations have an effect on maintenance costs. KONE is exposed to counterparty risks related to financial institutions through the significant amounts of liquid funds deposited into financial institutions, financial investments and in derivatives. In order to diversify the financial credit risk, KONE deposits its funds into several banks and invests a part of its liquidity into highly liquid money market funds. KONE also manages its counterparty risk by accepting only counterparties with high creditworthiness. The size of each counter-

12 12 KONE s January September 2014 review party limit reflects the creditworthiness of the counterparty and KONE constantly evaluates such limits. KONE is also exposed to risks related to the liquidity and payment schedules of its customers, which may lead to credit losses. To mitigate this risk, defined rules for tendering, levels of approval authority, and credit control have been established. The risks related to accounts receivable are minimized also through the use of advance payments, documentary credits and guarantees in KONE s payment terms. KONE s customer base consists of a large number of customers in several market areas, with no individual customer representing a material share of KONE s sales. KONE operates internationally and is thus exposed to risks arising from foreign exchange rate fluctuations related to currency flows from revenues and expenses, as well as from the translation of income statement and statement of financial position items of foreign subsidiaries into euros. The KONE Treasury is responsible for the centralized management of financial risks in accordance with the KONE Treasury Policy approved by the Board of Directors. For further information regarding financial risks, please refer to note 2 in the consolidated Financial Statements for Decisions of the Annual General Meeting KONE Corporation s Annual General Meeting was held in Helsinki on February 24, The meeting approved the financial statements and discharged the responsible parties from liability for the financial period January 1 December 31, The number of Members of the Board of Directors was confirmed as nine. Re-elected as Members of the Board were Shinichiro Akiba, Matti Alahuhta, Anne Brunila, Antti Herlin, Jussi Herlin, Sirkka Hämäläinen-Lindfors, Juhani Kaskeala and Sirpa Pietikäinen. Ravi Kant was elected as new Member of the Board. Iiris Herlin was re-elected as Deputy Member of the Board. At its meeting held after the General Meeting, the Board of Directors elected from among its members Antti Herlin as its Chairman and Jussi Herlin as Vice Chairman. Jussi Herlin was elected as Chairman and Anne Brunila, Antti Herlin and Sirkka Hämäläinen-Lindfors as members of the Audit Committee. Sirkka Hämäläinen-Lindfors and Anne Brunila are independent of both the company and of significant shareholders and Jussi Herlin is independent of the company. Antti Herlin was elected as Chairman and Jussi Herlin and Juhani Kaskeala as members of the Nomination and Compensation Committee. Juhani Kaskeala is independent of both the company and of significant shareholders. The General Meeting confirmed an annual compensation of EUR 54,000 for the Chairman of the Board, EUR 44,000 for the Vice Chairman, EUR 33,000 for Board Members and EUR 16,500 for Deputy Board Member. In addition, a compensation of EUR 500 was approved for attendance at Board and Committee meetings. Of the annual remuneration, 40 percent will be paid in class B shares of KONE Corporation and the rest in cash. The General Meeting approved the authorization for the Board of Directors to repurchase KONE s own shares. Altogether no more than 51,140,000 shares may be repurchased, of which no more than 7,620,000 may be class A shares and 43,520,000 class B shares. The authorization shall remain in effect for a period of one year from the date of decision of the General Meeting. Authorized public accountants PricewaterhouseCoopers Oy and Heikki Lassila were re-nominated as the Company s auditors. The General Meeting approved dividends of EUR for each of the 76,208,712 class A shares and EUR 1.00 for each of the outstanding 436,474,010 class B shares. The date of record for dividend distribution was February 27, 2014 and dividends were paid on March 6, Share capital and Market capitalization The Annual General Meeting in 2010 authorized the Board of Directors to decide on the issuance of options and other special rights entitling to shares. The authorization is limited to a maximum of 3,810,000 class A shares and 21,760,000 class B shares. The authorization concerns both the issuance of new shares as well as the transfer of treasury shares and the issuance of shares and of special rights entitling to shares may be carried out in deviation from the shareholders pre-emptive rights (directed share issue). The authorization will remain in effect for a period of five years from the date of the decision of the General Meeting. In 2010, KONE granted a conditional option program. The 2010 stock options were listed on the NASDAQ OMX Helsinki Ltd on April 2, The total number of stock options was 3,000,000 and 896,000 of them are held by KONE Corporation s subsidiary. During the reporting period 375,410 new KONE class B shares were subscribed with the 2010 option rights. On September 30, 2014 a maximum of 2,163,210 shares can be subscribed with the remaining outstanding option rights. Each option entitles its holder to subscribe for two (2) new class B shares at the price of, from February 25, 2014, EUR per share. The share subscription period for the stock option 2010 is April 1, 2013 April 30, In January 2013, KONE granted a conditional option program. Stock options 2013 are granted according to the decision of the Board of Directors on January 24, 2013 to approximately 480 key employees and the decision was based on the authorization received from the Shareholders Meeting on March 1, A maximum total of 750,000 options are granted. The original share subscription price for the option was EUR per share and it is further reduced in situations mentioned in the terms, for example with dividends distributed before the subscription of the shares. The effective subscription price as per September 30, 2014 is EUR Each option entitles its holder to subscribe for two (2) new or existing company s own class B KONE shares. The share subscription period for the stock options 2013 will be April 1, 2015 April 30, The share subscription period begins only if the financial performance of the KONE Group for the financial years , based on the total consideration

13 13 KONE s January September 2014 review of the Board of Directors, is equal to or better than the average performance of the key competitors of KONE. In December 2013, KONE granted a conditional option program. Stock options 2014 are granted according to the decision of the Board of Directors on December 20, 2013 to approximately 550 key employees and the decision was based on the authorization received from the Shareholders Meeting on March 1, A maximum total of 1,500,000 options are granted. The original share subscription price for the option was EUR per share and it is further reduced in situations mentioned in the terms, for example with dividends distributed before the subscription of the shares. The effective subscription price as per September 30, 2014 is EUR Each option entitles its holder to subscribe for one (1) new or existing company s own class B KONE share. The share subscription period for the stock options 2014 will be April 1, 2016 April 30, The share subscription period begins only if the financial performance of the KONE Group for the financial years , based on the total consideration of the Board of Directors, is equal to or better than the average performance of the key competitors of KONE. On September 30, 2014, KONE s share capital was EUR 65,389,628.75, comprising 446,908,318 listed class B shares and 76,208,712 unlisted class A shares. KONE s market capitalization was EUR 16,337 million on September 30, 2014, disregarding own shares in the Group s possession. Market capitalization is calculated on the basis of both the listed B shares and the unlisted A shares excluding treasury shares. Class A shares are valued at the closing price of the class B shares at the end of the reporting period. Shares in KONE s possession On the basis of the Annual General Meeting s authorization, KONE Corporation s Board of Directors decided to commence the possible repurchasing of shares at the earliest on March 4, During January September 2014, KONE did not use its authorization to repurchase own shares. In April, 395,040 class B shares in the company s possession were assigned to the share-based incentive plan and 4,460 class B shares as a part of the board members annual remuneration. In August, 24,000 class B shares were returned to KONE Corporation by virtue of the terms of KONE Corporation s share-based incentive program for the years At the end of September, the Group had 9,683,398 class B shares in its possession. The shares in the Group s possession represent 2.2% of the total number of class B shares. This corresponds to 0.8% of the total voting rights. Shares traded on the NASDAQ OMX Helsinki Ltd. The NASDAQ OMX Helsinki Ltd. traded million KONE Corporation s class B shares in January September 2014, equivalent to a turnover of EUR 5,650 million. The daily average trading volume was 969,958 shares (1 9/2013: 907,748, the number of shares has been adjusted to the increase in shares due to the share issue without payment). The share price on September 30, 2014 was EUR The volume weighted average share price during the period was EUR The highest quotation during the period under review was EUR and the lowest EUR In addition to the NASDAQ OMX Helsinki Stock Exchange, KONE s class B share is traded also on various alternative trading platforms. The volume of KONE s B shares traded on the NASDAQ OMX Helsinki Stock Exchange represented approximately 37% of the total volume of KONE s class B shares traded in January September 2014 (source: Fidessa Fragmentation Index, www. fragmentation.fidessa.com). The number of registered shareholders was 45,764 at the beginning of the review period and 52,381 at its end. The number of private households holding shares totaled 48,464 at the end of the period, which corresponds to approximately 13.9% of the listed B shares. According to the nominee registers 42.2% of the listed class B shares were owned by foreign shareholders on September 30, Other foreign ownership at the end of the period totaled 6.7%. Thus a total of 48.9% of KONE s listed class B shares were owned by international investors, corresponding to approximately 18.1% of the total votes in the company. Market outlook 2014 In new equipment, the market in Asia-Pacific is expected to grow clearly in The market in China is expected to grow by approximately 10%. The market in the EMEA region is expected to grow slightly. In Central and North Europe, the market is expected to remain stable or grow slightly, to further slightly decline in South Europe, and to grow in the Middle East. The market in North America is expected to continue to grow. The modernization market is expected to be rather stable or grow slightly. The maintenance markets are expected to develop rather well in most countries. Business outlook 2014 KONE specifies its outlook for KONE s net sales is estimated to grow by 6 8% at comparable exchange rates as compared to The operating income (EBIT) is expected to be in the range of EUR 1,015 1,045 million. Previous business outlook 2014 KONE s net sales is estimated to grow by 6 9% at comparable exchange rates as compared to The operating income (EBIT) is expected to be in the range of EUR 1,000 1,050 million, assuming that translation exchange rates do not materially deviate from the situation of the beginning of Helsinki, October 21, 2014 KONE Corporation s Board of Directors